Question 13 20 points You are given the following data for G

Question 13 (20 points) You are given the following data for Good Company Inc. for 2004, 2005, and 2006 (amounts in thousands). 2006 2005 2004 Net Income $445 $402 S345 Average number of common share outstanding 135 134 132 $964 $735 Average common shareholder equity $1231 a. Calculate ROCE for the three years. b. Calculate basic EPS for the three years. e. Interpret your findings for both ROCE and EPS

Solution

PART-1) Computation of ROCE

2004: $345/$735 = 46.9%

2005: $402/$964 = 41.7%

2006: $445/$1,231 = 36.1%

PART-2) Computation of basic EPS

2004: $345/132 = $2.61

2005: $402/134 = $3.00

2006: $445/135 = $3.30

PART-3) In general ROCE reduces and EPS increases during the three-year period. During 2006 the company issued additional shares of common stock, and increased average shareholders\' equity exceeds the number of outstanding common shares. Hence, we can notice a decrease in ROCE despite an increase in net income during the year. The net effect of the increased number of common shares outstanding and increased earnings is an increase in EPS.